Friday, January 29, 2010

Market Folly readers can receive an exclusive $50 discount to the Certified Hedge Fund Professional (CHP) Program. There are only 180 spots left, so take advantage of it. To receive the discount, enter your email address in the form at the bottom of this page. Once you get an email, just mention Market Folly and you'll receive the exclusive discount.

The CHP program is like the CFA, CAIA, and other certification programs except for the fact that it is exclusively focused on hedge funds. If you pass the program, in addition to being able to list it on all your professional credentials, you'll have access to their free workbooks, educational videos, all the networking events and tons of other resources.

Here are some testimonials from members who have already completed the program:

From Andy R. (Hedge Fund Manager) : "As a former Hedge Fund manager looking to launch a new fund in the next year, I was intrigued by the prospect of increasing my knowledge and understanding of a variety of platforms, strategies, and new regulations that are likely to come through the CHP. I believe that this designation is a long overdue way to separate the wheat from the chaff in an industry that, while currently in a down cycle, will remain as an integral component for financial planning and asset allocation in the future."

From Dominic Di Bernardo (Student): "I am taking this hedge fund certification program to expand my knowledge base of the hedge fund industry. I believe this designation will give me an edge over others trying to enter the industry. Lastly, I believe that I will be able to gain valuable contacts through the program, other designation candidates, and anyone else that stands behind the designation."

From Soumen Gopal (Hedge Fund Manager): "There are three reasons why I joined this hedge fund certification program. The first is the focus: this program is focused very deeply on the hedge fund industry, performance, and investment strategies. The second important point about this program is the speed of completion, as many other programs take much longer to complete. The last reason was the networking benefits. You can come out of this program and attend networking events and meet others in the industry and this is very helpful."

At the end of 2009, John Burbank's hedge fund Passport Capital took possession of their physical gold investment. It is kept in custody in Zurich with UBS and represents a 1% allocation in Passport Global. What's interesting here is that Passport also notes that they intend to increase their exposure via physical gold and that they are unlikely to buy various proxies for gold (i.e. exchange traded fund GLD).

Passport has published a white paper on their rationale for owning physical gold. In it, they examine the supply/demand dynamic, the impact of central bank action on gold, as well as the implications of owning "paper" gold versus physical. This is not the first time we've seen specific research published by the firm, as we covered their previous case for agriculture as well.

This is very intriguing for two reasons: Firstly, because many of the hedge funds we track have been long gold. Secondly (and more importantly) is because we are now seeing more and more funds shift from 'paper' gold exposure to physical gold. David Einhorn's Greenlight Capital was one of the first major funds to store physical gold as they cited lower storage costs (versus expense ratios) as their rationale. And now we see Passport Capital doing the same, but for slightly different reasons.

Then on the other hand, you have John Paulson's hedge fund Paulson & Co holding billions worth of GLD. Paulson owns the 'paper' proxy for gold but it is merely a hedge to their fund share class denominated in gold. Paulson & Co then also launched a new gold fund as a wager against the US dollar. Additionally, we saw that hedge fund manager Eric Sprott is launching a physical gold trust and also published a special report on gold entitled, "The Ultimate Triple-A Asset."

Josh Berkowitz (ex-Soros Fund) and his global macro fund Woodbine Capital published a piece in December entitled, Gold: The Anti-Goldilocks where they take a different look at gold. They have owned gold as well as deep out of the money puts on gold. However, they view this position not as a hedge against inflation or deflation, but rather as a part of their theme of stronger emerging market demand.

As you can see, plenty of prominent hedge funds have gotten involved with the precious metal in various capacities and it's interesting to sit down and compare their rationale. The main takeaway here is that different funds own gold for different reasons and via different vehicles.

Hedge fund Passport Capital has decided to drill down the debate to which type of gold to own: 'paper' or physical. They've elected to go the physical metal route and embedded below is their rationale:

Make sure to check out Passport Capital's John Burbank & many other prominent fund managers (including Eric Sprott) as they present investment ideas at the Value Investing Congress on May 4th & 5th in Pasadena, CA. We secured a discount for our readers, so be sure to use discount code: P10MF5.

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has put out their annual letter. In this latest letter to investors, they address the macro environment, talk about how their portfolio fared, and discuss their largest long and short positions.

Since hedge funds often do not reveal their short positions, we wanted to make special note of this glimpse we get into their short book. We had previously seen some of their shorts, but the list below is more expansive. Whitney Tilson and many other prominent hedge fund managers will be presenting investment ideas at the Value Investing Congress May 4th & 5th in Pasadena and we highly recommend attending. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

T2 Partners' ten largest short positions heading into this year were (in alphabetical order):

1. Capital One (COF): In T2's letter, Tilson and Tongue mention that this is a hedge to their long of American Express (AXP).

2. Dow Chemical (DOW): This is a hedge to their long position in Huntsman (HUN).

3. Homebuilders (various plus an ETF): T2 Partners has been bearish on the housing market.

4. InterOil (IOC): Tilson has been bearish on this name for a while and argues that all their press releases (there's a lot of them) have artificially lifted the stock higher on no substantial news.

5. iShares Barclays 20+ Year Treasury Bond (TLT): We now see yet another hedge fund shorting long-term treasuries as a bet on rising interest rates, inflation, etc. This was one of Howard Marks' main recommendations in his recent plays for inflation. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

6. iShares Dow Jones Transportation Average (IYT): This appears to be another macro hedge.

7. Moody's (MCO): T2 Partners joins hedge fund colleague David Einhorn & Greenlight Capital who are also short MCO. In Einhorn's recent investor letter, he mentioned how this short position has been causing them pain, but they still feel Moody's faces headwinds.

8. Netflix (NFLX): Shares are up sharply on this name after they just reported earnings. This stock had been heavily shorted by hedge funds and looks to be causing everyone on the short side some pain.

9. Retail HOLDRs (RTH): This seems to be another macro hedge/short as they wager against consumer spending, and in particular discretionary spending. This gives them exposure to a basket of names.

10. Vistaprint (VPRT): This short position is intriguing because we've known many other hedge fund managers to be short. However, a few prominent hedgies also have long positions, so it's interesting to to note the difference in opinion. When we looked at the portfolio of Stephen Mandel's Lone Pine Capital, we noticed they had a large Vistaprint stake. Additionally, fellow hedgie Matt Iorio and his White Elm Capital had been long. We'll have to see which side of hedge fund land wins this battle.

Moving on, we also got to see their twelve largest long positions as of 12/31/09 and they are as follows:

2. Berkshire Hathaway (BRK.A/BRK.B): Tilson was recently out talking about how he thinks Berkshire is undervalued and how it could be added to the S&P 500. His latter point just recently came to fruition as BRK.B replaced Burlington Northern in the index. This creates a ton of buyers as index funds will need to buy $38 billion worth of BRK.B, around 23% of the total shares outstanding.

3. Iridium stock/warrants: They note that it is growing very rapidly and has taken market share from competitors.

4. Microsoft (MSFT): They think this name is cheap, safe, and rapidly growing.

5. American Express (AXP): While they have been trimming their long position as it has risen, they deem it currently at 'reasonable valuation' and continue to hold.

6. Huntsman (HUN): They believe the company is now well poised to ride out the economic crisis after their net debt declined by almost $3 billion and they have no more meaningful maturities until 2012.

10. Yahoo! (YHOO): This is definitely a contrarian play in the tech space as most of the hedge funds we follow are long Google (GOOG). T2 believes that Yahoo's intrinsic value is nearly double its current price.

11. Fairfax Financial (FRFHF): They feel this is a "diverse collection of high-quality insurance businesses at a discount to intrinsic value."

12. Wendy's Arby's Group (WEN): They are confident Nelson Peltz and his team can turn Wendy's around just like they did with Arby's.

So, there you have their long and short positions. Embedded below is hedge fund T2 Partners' annual letter in its entirety (RSS & Email readers will need to come to the site to see it):

The guys over at MarketClub just highlighted an interesting fact: the Nasdaq just crossed a major trend line. Check out their Nasdaq technical analysis here. One of the most basic tools in technical analysis is drawing a trend line on the chart. To do so, all you need is to connect 3 points. Then all you have to do is buy/stay long as long as the trend remains. Once it breaks, get out/go short. As they say, "the trend is your friend"... until it isn't. In this case, the Nasdaq has broken it's current trendline as evidenced by the chart below:

This trend line has been in tact for almost 11 months now. The longer the trend line is, the more important it becomes. MarketClub makes special note of this because the momentum appears to have slowed down. Using fibonacci retracements, they've outlined a downside target of 1,796 or even 1,691 which would imply quite a large correction. Head here to watch their Nasdaq video.

Wednesday, January 27, 2010

Below you will find Prologue Capital's December 2009 investor letter. Prologue is a UK-based hedge fund managing $800 million. They returned 6.92% in 2006, 7.47% in 2007, 18.86% in 2008, and 12.5% in 2009. They certainly didn't have any problems with the tumultuous markets of 2008. Their letter is part of our wisdom Wednesday series of documents and resources.

Chief Economist Tomas Jelf authored the letter and laid out their strategies for 2010:

It's also interesting to see them play gold via options rather than owning the metal as this leveraged bet offers them more opportunity for upside. We've started to see a few other global macro funds favor options over playing the metal itself, which could be a rising trend. The various long/short equity funds we track on the site have favored owning physical gold (David Einhorn of Greenlight Capital). And of course hedge fund Paulson & Co (John Paulson's firm) has started a gold fund.

Today we present you Corsair Capital Management's investor letter as part of our wisdom Wednesday series of documents and resources. Since inception in 1991, they've seen an annualized return of 15.4% and a total return of 1409%, very impressive numbers. Below you'll find the latest investor letter from Jay Petschek and Steven Major. They present their market outlook, summary of how their positions have fared, as well as the investment case for KAR Auction Services (KAR).

Bank of America Merrill Lynch has released the latest iteration of their hedge fund trend report and we gain some more insight as to which direction hedge funds are moving with their portfolios as of late. We continue our theme of 'wisdom Wednesday' here at Market Folly where we've been posting up insightful letters, research and resources from various sources. We've already posted up Bill Gates' 2010 annual letter, as well as Bill Gross' February investment outlook out of PIMCO. Next, let's get back to our main focus: hedge funds.

In their hedge fund monitor report, BofA analyzes the week-by-week movements of hedge funds as a whole, and here's what they're seeing. In equities, hedge funds were very long the Nasdaq (NDX) and have been selling the S&P 500 (SPX). In commodities, they were very long gold and crude oil (but reducing their position sizes), while still being very short natural gas. They also continue to buy copper. In currencies, they were long the US dollar and short the Euro. This is very much in line with what we saw last time we looked at hedge fund positions & exposure.

In terms of treasuries, hedge funds were long the 2 year treasury and short both the 10 year and 30 year treasuries. Specifically, they have reduced their short exposure in the 10 year and have increased their short exposure in the 30 year. They also slightly decreased their long in the 2 year. Overall, this trade is still in line with the curve steepeners we've been talking about for months now. Hedge funds (and even hedge fund legends) have been betting on higher interest rates and inflation. Just yesterday, we posted up about how Howard Marks of Oaktree Capital had outlined plays for inflation. Here's a few more examples: One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

Turning now to hedge fund exposure levels, we see that long/short equity funds have "continued to pare their market exposure to ~30-32% net long last week, dipping further below the historical average range (35-40%). At the same time, Market Neutral funds' equity exposure continued to rise after spiking up sharply last week to the highest levels since June. Macro HF's modestly net long US equity exposure remained largely unchanged last week while at the same time they bought the Emerging Markets but continued to sell the EAFE region."

Since we like to mainly focus on long/short equity funds as they're the easiest to track, we wanted to also provide some more color on their positioning. Specifically, they are favoring large cap stocks and 'high quality' names. When we last covered l/s equity positions, we saw that they were favoring value stocks. This play has been somewhat neutralized now. Still though, they definitely shifted away from growth plays in early January. While they also have positive inflationary expectations, these expectations are slightly lower than previous readings. As we've detailed with Bill Ackman's latest play, hedge funds are definitely favoring high quality companies with lots of international exposure as a means to deter inflation.

Embedded below, you will find the entire Bank of America Merrill Lynch hedge fund monitor report. RSS & Email readers, you'll need to come to the site to view it:

His latest commentary entitled, "The Ring of Fire" focuses on how investors should invest in 'less levered countries'. In terms of identifying such countries, Gross says to look for a growing consumer sector, low national debt levels, a savings oriented economy, and high reserves. He advises investors to find countries like Brazil and China, but ones that are less bubble-prone. Specifically, he points out to avoid the UK as their high debt coupled with possible currency devaluation presents high risk. Among countries that are already developed, Gross favors Canada and Germany. His latest piece comes after his January commentary where he examined the Federal Reserve's exit strategy.

Presented without comment is Bill Gates' annual letter for 2010. Today is 'wisdom Wednesday' here at Market Folly as we look to share a plethora (yes, a plethora) of insightful resources. The letter is embedded below and you can also download the .pdf here.

Tuesday, January 26, 2010

We recently posted up hedge fund Hovde Capital's third negative presentation on mall operator General Growth Properties. Whitney Tilson of hedge fund T2 Partners just cranked out another rebuttal to Hovde's piece and you'll find it below:

"Hovde Capital, after writing at the end of its Dec. 29th report that “We have no interest in continuing a public dialogue on this company,” published yet another critique of Pershing Square’s analysis of General Growth Properties on January 21st (see www.docstoc.com/docs/22973163/General-Growth-Properties---3).

It’s getting very tiring rebutting Hovde’s flawed (and constantly changing) “analyses” over and over again, but since it remains a very large position for us, we feel compelled to set the record straight.

Calculation of NOI

Hovde makes numerous arguments in its latest missive, none more important than the claim that “Pershing Square calculate[s] NOI differently when comparing GGP and SPG.” (pages 4-10) We believe that Hovde’s analysis is incorrect and that Pershing Square's analysis is consistent and accurate.

The confusion appears to come from the different definitions (and therefore calculations) of NOI that exist in the industry. We believe the only way to fairly compare NOIs is to use a tightly defined definition and then apply that definition consistently. Since companies don’t do this, it is left to the investor to create an apples-to-apples comparison using source documents. Below we calculate NOI for GGP and SGP, using a consistent definition, which shows that Pershing Square’s numbers are correct: GGP’s trailing-12-month cash NOI is $2.478 billion and SPG’s is $3.244 billion.

Hovde makes a basic error when it challenges Pershing Square’s valuation of Development Pipeline Assets (page 23), Cash (page 27), and Other Assets (page 29). In each case, Hovde fails to realize that GGP reports two balance sheets (see its latest 10-Q at: www.ggp.com/Investment): a consolidated one (page 3) and an unconsolidated one (page 24). Hovde’s calculations only refer to the former – a glaring oversight that it compounds by arrogantly mocking Pershing Square’s analysis (which is correct) with phrases like “Was this a calculator malfunction?” and “Everyone makes mistakes sometimes?” Indeed, everyone does – and in this case, it’s Hovde.

First some background: like most mall companies, GGP has numerous joint ventures with other parties to develop malls. The terms of the joint ventures vary, but on average GGP has a 50% interest. Some companies (like Simon) consolidate their share of joint ventures in their financial statements, while others (like GGP) break it out separately. To do an apples-to-apples comparison, one must be consistent, which in this case means including 50% of GGP’s unconsolidated balance sheet. This is exactly what Pershing Square does, which it discloses in footnote 2 of each page Hovde includes in its presentation (pages 23-25, 27 and 29), which reads: “Applies 50% to metrics in GGP’s unconsolidated balance sheet. Source: pages 3 and 24 of GGP’s Q3 10-Q.” In other words, despite Pershing Square telling Hovde exactly which pages to look at, Hovde says it can’t understand Pershing Square’s math. Did Hovde really publicly mock Pershing Square’s numbers without bothering to read the footnotes of Pershing Square’s presentation, even on the pages it copied and pasted into its own presentation???

Here’s the correct math, which in each case is precisely what Pershing Square presented:

Pershing Square then discounts this by 35% (which it discloses in footnote 7), reflecting the risk and uncertainty surrounding development projects (note that it only discounts SPG’s development assets by 20%) to arrive at $779,333, which is the number in its presentation.

(Note: On pages 23, 24 & 25, Hovde makes another mistake when it uses $1.05 billion for GGP’s development pipeline. Hovde’s figure comes from pages 34-35 of GGP’s latest Supplemental Financial Information (www.ggp.com/Investment), but is incorrect because it only includes “significant” projects and excludes international projects. The correct number, $1,198,974, is derived above from GGP’s consolidated and unconsolidated balance sheets.)

We continue to believe that GGP is very likely in the near future to either exit bankruptcy or be acquired – in either case, the stock should be north of $20. Our view is reinforced by today’s announcement that GGP “has engaged UBS Investment Bank, a leading global full service financial firm, to assist the Company in evaluating potential financial transactions for emergence from Chapter 11, raising exit capital and with such other matters as may be required by the Board of Directors.” (http://finance.yahoo.com/news/General-Growth-Properties-bw-2228451010.html?x=0&.v=1)"

We haven't done a technical analysis roundup in some time so we decided to post up some charts on various topics. Included in this post is:

- A look at the Dow Jones- A possible trade in long-term treasuries- Historical comparisons between 1930 and the current market- And a look at a multi-decade stock market trendline

Since a lot of people seem to be worried that the primary trend in the markets has recently been violated, Adam decided to create another technical analysis video on the Dow Jones Industrial Average (DJIA). Regarding this video, he writes, "For some time now we've been very concerned that all the major indexes are in the 'thin air' and have exceeded some key Fibonacci retracement levels. This new short video explores that and looks at a key Japanese candlestick formation that could really make a difference and be the first clue in the demise of the Dow. I'll also show and share with you a specific number to look for in February. Should this level be broken, then it will signal a major reversal to the downside for the Dow."

Below he outlines some of the retracement levels that could act as support if the market starts to break down:

He outlines two key levels to watch in the Dow Jones Industrial Average. Firstly, he notes that if the market closes below 9,678 then look out below. Secondly, based off of Fibonacci retracements, he identifies a downside target level of 9,712. Adam and MarketClub are currently out of the market as they let the prices dictate the action and wait for a better signal. They are definitely very cautious here. Watch his video for further technical analysis insight.

Secondly, we wanted to highlight something that we've noticed recently regarding technical action in long-term treasuries. Just yesterday we posted up Oaktree Capital and Howard Marks' plays for inflation and shorting long-term bonds was one of his suggestions. Not to mention, we've covered numerous hedge funds that have been in curve steepening plays as they bet on higher interest rates. Now, it could very well be a longtime before we truly see signs of inflation. However, there seems to be a trading opportunity at hand. See our annotated chart below for the play:

(click to enlarge)

Basically, long-term treasuries have rallied right up to the 50-day moving average and a previous support level. Both of these are now resistance and the short-term trend is downward. Additionally, the iShares 20+ Year Treasury exchange traded fund TLT seems overbought, you could have a low-risk setup with clearly defined exit points.

Lastly, we also wanted to post up some charts from Steve Puri. He highlights some historical trends to put the giant stock market rally of 2009 into perspective. Given that the market has sold-off hard as of late, Steve points out a chart that could really scare you by comparing the current stock market to that of 1929-1930, where after a large rally the bear market returned and another leg down began:

(click to enlarge)

Potentially scary stuff there as bear markets are known for their vicious rallies and declines. Are we heading down further? We'll have to wait and see, but it never hurts to be cautious. We also wanted to highlight another chart Steve posted up regarding long-term trendlines. The chart he posts illustrates that in 2009 we broke a long-term trendline, but the market has subsequently rallied right back up to it. He suggests to go short as this will serve as resistance and to exit the short on a monthly close above that trendline he's drawn:

(click to enlarge)

Through all of the above, keep in mind that technical analysis is in the eye of the beholder. You can almost always annotate charts in a way that supports your case. That said, it is definitely one of the many useful tools in the investment toolbox. Note that this isn't meant to be some doomsday post. We just wanted to share these charts because they do make you stop and think.

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